The Select Senate Committee on Transportation Routes to the Seaboard in 1874 estimated the excess of the capital over actual cost of the Erie road, from New York to Dunkirk, at $68,807,000; that of the New York, Lake Shore and Michigan Southern line to Chicago at $115,188,137, and that of the Pennsylvania and Fort Wayne line to Chicago at $11,290,374. If this estimate was correct the entire over-capitalization of these lines, on which the commerce between the West and the East was forced to pay a dividend of 8 and 10 per cent. per annum, was no less than $195,000,000. The committee assumed the actual cost of these roads to be $182,000,000, or about $78,000 per mile. They based their estimate upon the cost of the main branch of the Baltimore and Ohio, as reported by their officers, supposing it to represent the actual outlay made by its stock-and bondholders. Various revelations which have since been made to the public, as to the real cost of railway construction, justify the belief that the estimated cost of $78,000 per mile for those roads is far too high. Mr. Henry Poor, several years ago, estimated the average cost of the roads of the United States at $30,000 a mile. Making allowance on one hand for Mr. Poor's tendency to favor the railroad side of the question, and on the other hand for the more expensive grades, double tracks and better terminal facilities of these trunk lines, $50,000 per mile may be considered a fair estimate of their average cost. Upon this basis the total cost of the three lines in question would amount to $116,450,000, and the excess of their capital over actual cost would be the enormous sum of $261,000,000, or 325 per cent. of their actual cost, and probably not less than 400 per cent. of the original cost to their stock-and bondholders. The capital of these companies has since been considerably increased, to enable their managers to increase their dividends, and with it the tax levied upon the commerce of the country.
These are only a few of the many instances of stock watering that might be mentioned. In fact, there are to-day very few railroads in the United States that are entirely free from it. It is a notorious fact that the stock of a large number of railroad companies represents little or no value, having either been sold at a mere nominal price or been donated as a premium or bonus to those who purchased a large amount of the company's bonds. In recommending, in his December, 1891, annual message, Government aid for the Nicaragua Canal, President Harrison said: "But if its bonds are to be marketed at heavy discounts and every bond sold is to be accompanied by a gift of stock, as has come to be expected by investors in such enterprises, the traffic will be seriously burdened to pay interest and dividends." It is not difficult to surmise to what enterprises the President referred. It has for many years been a well-settled principle among railroad incorporators that no larger assessments should be made upon the stockholders than is necessary to float the company's bonds. A company, for instance, is organized with a capital stock of, say, $1,000,000. Five per cent. of this sum, or $50,000, is paid into defray preliminary expenses. The road is then bonded for perhaps $2,000,000, but as the bonds are sold for only 80 per cent. of their face value and as the incorporators allow themselves 5 per cent. for the negotiation of the bonds, only $1,500,000 is realized for the construction of the road. The incorporators now vote to themselves a contract to construct the road for $1,500,000 and at once sublet it to a contractor who is ready and anxious to build the road for $1,200,000. The incorporators thus realize $1,000,000 worth of stock, a portion of which is unloaded upon unsophisticated investors, and $300,000 in cash, at an outlay of $50,000; and the road, which cost $1,200,000, is made to pay interest and dividends on a total capital of $3,000,000, and this is subsequently watered indefinitely if the road proves profitable or a consolidation with some other road justifies the belief that its earning capacity might be increased. Nor is this an overdrawn picture. On the contrary, instances might be cited where only one-half of one per cent. of the company's stock was paid in by the shareholders.
In the days of inflation such transactions did not seem to seriously affect railroad securities. Even when they were no longer a secret to the public, stocks and bonds sold readily, because, owing to the large earnings of the roads, this class of investments was unusually productive.
In 1868 the earnings of the railroads of Massachusetts averaged $15,400 a mile, and were equal to 38 per cent. of the total reported cost of all the lines of the State. The Chicago, Burlington and Quincy earned $15,386 per mile in 1867, and paid a 15 per cent. dividend. Its stocks were quoted 100 per cent. above par. In 1867 the Lake Shore Railroad earned more than 50 per cent., and the Terre Haute and Indianapolis even as much as 57.2 per cent. of the amount of its cost. Previous to the war the inflation of railroad securities was, as a rule, confined to the stock. Where roads were bonded for more than the cost of construction it was, with but very few exceptions, done to make their capital to correspond with their earning capacity, or rather to divert public attention from the fact that the rates in force had outlived their reasonableness. It was reserved to the Union Pacific and the Central Pacific companies to bond their roads from the beginning to an amount equal to twice their actual cost, or, in other words, to virtually receive them as a present from the Federal Government, bond them for all they were worth, and, in addition, issue stock to an amount largely in excess of the cost of construction, and then try to earn interest and dividends on the whole amount of securities issued. The history of these companies forms so interesting and instructive a chapter in the railroad annals of America that a short synopsis of it may not seem out of place here.
The charter of the Union Pacific Railroad Company was granted by Congress on the first day of July, 1862. Shortly after the beginning of the War of the Rebellion it was made to appear to the country that a transcontinental road was a national necessity; that without it we could not hope to retain long the Pacific Coast. It was also very plausibly argued that the political benefits to be derived by the country from the construction of such a road, as well as its great length and extraordinary cost, made it the duty of the nation to aid liberally its enterprising and patriotic promoters in the prosecution of their gigantic task. In those stirring times few people were inclined to question the motives of those who advocated what appeared to be patriotic measures, or to be penurious in the expenditure of public funds when the public weal seemed to demand such expenditure.
The Union Pacific Railroad charter, which in substance was passed by Congress as it had been drafted by the promoters of the enterprise, gave to the new company the right of way through the public lands, and authorized it to take, from the lands adjacent to the line of its road, earth, stone, timber and other materials for its construction. It further granted to the company every alternate section of land to the amount of five alternate sections per mile on each side of its line, excepting only those lands to which preëmption or homestead claims attached at the time when the line of the road should be definitely fixed. In addition to these donations the United States issued to the company subsidy bonds in an amount equal to $16,000 per mile for the distance from the Missouri River to the eastern line of the Rocky Mountains, $48,000 per mile for a distance of 150 miles through the Rocky Mountains, and $32,000 per mile from the western base of the Rocky Mountains to the terminus of the road. Similar franchises were at the same time given to the Central Pacific Railroad Company, a corporation which had previously been chartered by the State of California. Besides its grant of right of way, land, timber, etc., this company received subsidy bonds at the rate of $16,000 a mile for a distance of 7.18 miles east of Sacramento, of $48,000 a mile for 150 miles through the Sierra Nevada, and of $32,000 a mile for the distance from the eastern base of that mountain range to its junction with the Union Pacific. The charters of the two companies provided that, to secure the repayment to the United States of the amount of those bonds, they should ipso facto constitute a first mortgage on the entire lines of the road, together with their rolling stock, fixtures and other property. The franchises and donations thus granted by Congress were most valuable; in fact, the latter were alone sufficient to build and equip the roads. In spite, however, of the liberal grants and in spite of the urgent necessity of the roads in those years of national trial, both of these enterprises made very slow progress. Their promoters were men of small means, and the capitalists to whom they appealed for help failed to realize the value of the franchises. No doubt when these men first engaged in their cause they expected to encounter serious obstacles in Congress, supposing that that august body would consider the proposed measure with much deliberation and to act upon it with still more circumspection. Their success greatly surprised them. They made the discovery that members of Congress could be imposed upon as easily as private citizens, and when they fully realized how readily their demands had been granted, they were greatly provoked at themselves because they had not asked for more.
According to a story told by my old friend Mr. J. O. Crosby, an experienced member of the brotherhood of tramps late one afternoon chanced to stroll into the city of Alton. Having no visible means of support, he was picked up by the police and brought before the Mayor to give an account of himself and to be dealt with as that dignitary might see fit. The tramp, a printer by profession, and by no means a tyro in meeting such emergencies, so managed to impress the Mayor with his superior accomplishments that the latter concluded it would be a good investment, both for himself and the city over which he presided, to offer the genial stranger a contribution to his traveling fund, upon the condition that he would no longer than absolutely necessary molest the city with his presence. He accordingly told the intercepted tourist that while it had been for years the policy of the city and its officials to entertain all tramps found within the limits of Alton for thirty days at the city jail in exchange for a fair amount of labor, he would, in consideration of the apparent fact that he was of better metal than the average tramp, make an exception in his case, and would, even at the risk of being censured for it by his constituents, hand over to him five dollars from the municipal funds if he would agree to leave the city early next morning. The tramp gladly accepted the proposition, replenished his empty purse with the proffered bounty and withdrew from the City Hall, to take a stroll through Main Street. The city seemed to him as prosperous as the Mayor had shown himself liberal. It occurred to the itinerant typographer that its treasury would not have been the worse off for a ten-dollar levy, and he hastily returned to the Mayor's office to plead for a larger donation. The Mayor, not disposed to argue the question, handed him another five-dollar bill and improved the opportunity to remind him of his previous promise and to give expression to the hope that as a gentleman of honor he would now discharge his obligation. The tramp fairly overwhelmed His Honor with assurances of good faith and bade him an affectionate good-by. The next rising sun found him on his onward journey. His route led through Alton on the Hill, a portion of the city which he had not seen before. He viewed with surprise the many fine residences and other evidences of opulence which this part of the city contained. He passed on in a pensive mood until he reached the summit of the hill, which commanded a fine view of the entire city. Here he turned to cast a farewell glance over the town ruled over by the most generous mayor that it had ever been his privilege to meet. As he beheld before him the fine homes and beautiful yards, and below in the valley the lofty church-steeples, the many school-houses, the massive business blocks, the long and well-paved streets and the spacious and shady parks, an expression of mingled surprise and disappointment stole over his face. He thrice slapped his wrinkled brow and then hurriedly retraced his steps down the hill. When the chief magistrate of Alton came to his office that morning, he met the irrepressible tramp anxiously waiting for him at the door. "Mr. Mayor," said the wily extortioner, "I acted very hastily yesterday when I accepted your second proposition. You have here a much larger town than I ever supposed. I have been constrained to take our last agreement into reconsideration, and I shall not leave this point until you add another five dollars to your consideration. You can certainly better afford to do that than to throw away thirty days' board and the ten dollars which you have already paid me besides."
The diplomacy of the Union Pacific and Central Pacific railway companies was the same as that of the Alton tramp. They had found Congress as generous as the tramp had found the Mayor of Alton, and now reproached themselves for their modesty and resolved to bring the pliability of Congress to a severer test. They again appeared before that body in 1864 and asked that their charter be so amended as to grant to them ten alternate sections instead of five on each side of the road, and also all the iron and coal found within ten miles of their track, which had previously been reserved by Congress. And in addition to this they asked that they be authorized to issue their own mortgage bonds on their respective roads to an amount equal to the bonds of the United States, and that the lien of the United States bonds be made subordinate to the lien created by the companies' bonds. By the act of Congress, July 2, 1864, all these demands were granted, and the two companies were thus virtually presented with their roads and were at the same time given permission to mortgage this gift of the people and divide the proceeds among their shareholders, many of whom had received their stock chiefly in consideration of their influence in and out of Congress. The contribution of the United States to these companies on account of their main lines has not been far from $80,000,000, of which over $52,000,000 was paid in bonds, and the remainder in lands, which aggregated about 23,000,000 acres. The whole line from Council Bluffs to Sacramento is 1,780 miles long. It will thus be seen that the national contribution was about $45,000 per mile, besides the right of way and all timber, iron and coal found within ten miles of the road. There is no doubt that this contribution was equal to, if it did not exceed, the actual cost of the road. There has been an erroneous impression abroad which has likened the Pacific road to those wonderful and very expensive lines which cross the Andes and the Alps. Those who have not crossed the continent can hardly believe that the construction of this line was neither more difficult nor more expensive than that of any of the numerous railroads crossing the mountain ranges of the East, but such is the fact.
Starting from Omaha, the Union Pacific follows for nearly 500 miles, or almost half of its entire length, the valley of the Platte River. A better route for a railroad cannot be found upon the western continent. There are between Omaha and Cheyenne but three bridges worthy of the name. The Platte Valley is almost straight, rising toward the west at a nearly uniform rate of about 10 feet to the mile. Grading was practically unnecessary, and the work of construction consisted of little more than the laying of the ties and track. From the base of the mountains at Cheyenne to their summit is a distance of about thirty-two miles, the difference in altitude between the two points being less than 2,200 feet. The average grade is therefore about 68 feet to the mile, and nowhere are the grades heavier than 80 feet to the mile. There are heavier grades than these in the prairie State of Iowa, and the mountain grades of a number of Eastern roads exceed those of the Union Pacific by from 30 to 40 feet to the mile. The rise is, if not uniform, at least gradual, and the construction of even this portion of the road required, therefore, neither great engineering skill nor any unusual expenditure of money. The road now crosses a plateau which extends almost to the terminus of the Union Pacific at Ogden, and a very large portion of this is as favorable for a roadbed as the average railroad territory of the country.
The route of the Central Pacific presented to the engineer no great obstacles between Ogden and the State line of California, the only elevation of any note to be surmounted being the Humboldt Mountains in Nevada. Their highest point, Humboldt Wells, is 221 miles west of Ogden, and has an elevation of 5,650 feet above the level of the sea, while that of Ogden is 4,320 feet. Upon an average the grades of this portion of the road do not differ from those found in the Mississippi Valley. The portion of the Central Pacific Railroad which traverses the Sierra Nevada is the most expensive of the whole line, but the cost of construction did not, even on this division, exceed the amount contributed for it by the Federal Government; for the statement is made upon good authority that a few of the leading promoters of the road built the first western section of twenty miles with their own capital, of less than $200,000, and a loan from the city of Sacramento and Placer County, amounting to $550,000, and then drew $848,000 Government subsidy, or more than enough to build the second section and draw another installment of the subsidy; and that they repeated the operation until the whole line was completed. These men were in such haste to realize the profits which their undertaking promised them that they did not even take sufficient time to make a proper survey of their line. Had they done so, a great saving, both in the construction and in the subsequent operation of the road, might have been effected. It is now well known that a route could have been found through the Sierra Nevada Mountains, not far distant from the route chosen, which would have saved 800 feet in elevation and at least 25 per cent. in the expense of grading.